Differentiate your company in a sell-side process
Don’t get me wrong — I’m not saying your business is a pig. I’d never say that; I know it’s your baby. But we’ve all heard the expression “putting lipstick on a pig.” It just doesn’t work. Unfortunately, many sellers do just that, shortcutting the preparation process, relying on the perceived “country club” value of their business and rushing to market. Instead, a seller should clean up and perform due diligence to better understand the true value of the business.
Follow these five steps to help your company stand out in the sale process.
- TAKE STOCK EMOTIONALLY
The first step is to do some soul-searching and really decide if you want to sell. It seems obvious, but so many sellers neglect this first step, causing unnecessary heartache for themselves and potential buyers. In fact, I’ve seen potential sellers literally walk away from the altar at the 11th hour when reality hits them.
Often, selling a business creates a void in the owner’s life. So, before you decide to sell, it’s good to ask yourself some serious questions. What do you plan to do with the money from the sale? Is it enough to live on? How will you spend your days? Do you have philanthropic interests? Do you have hobbies? Truly take stock and talk to your family and your most trusted business advisor to make sure you’re emotionally ready.
- GATHER YOUR TEAM
Now that you are ready to let go, reach out to your closest trusted advisor, generally your attorney, accountant or banker. Ask them to help you develop a team of experts — including accountants, lawyers, wealth advisors and investment bankers — with deep transaction experience. This could require an honest assessment of your current team of professionals to ensure they have the right skill sets for the job.
Many sellers try to embark on this process alone, without a team of professionals who “do this stuff for a living.” This approach is very risky, and although on the surface it may seem like a prudent way to save money in the near term, it often distracts you from the day-to-day running of the business. Not having a team can result in a lack of control over the process, significant erosion of transaction value and a completely failed process.
- PROFESSIONALIZE YOUR MANAGEMENT TEAM
The other team you need to focus on is your management team. Many entrepreneurs pride themselves on running a lean operation and being the one person who’s key to everything at the company. This serves many businesses well in the early years, but to differentiate your company to potential buyers, it’s often wise to upgrade and professionalize the management team in advance of a sale transaction.
By having a professionalized management team in which key customer and vendor relationships are not all tied to one person — generally you, the owner — potential buyers will have the confidence that the business can thrive after you are no longer at the helm. If you haven’t prepared your management team to take over, you won’t be able to walk away from your business after the sale. As a result, the buyer will likely hold back a significant portion of the purchase price.
- GET YOUR HOUSE IN ORDER
If you have not already realized the need, your team of external experts can significantly help you get your house in order. This stretches all the way from locating and organizing key documents (such as articles of incorporation, by-laws, minute books, S-corporation election, tax returns, financials and insurance policies) to performing sell-side quality of earnings to understand the true cash flow potential of the business. It even might include literally sweeping the shop floor. It may sound silly, but you wouldn’t try to sell your house without making sure it was clean first. This same common-sense approach should apply to your business.
- CONTROL THE PROCESS
Whoever controls the process will have the upper hand in negotiations. With proper preparation and assistance from experts, the seller should control the process. Set the right tone and make sure you don’t let the buyer control the process. Fix what you can before entertaining potential buyers, and be sure to set and manage expectations along the way. With appropriate sell-side diligence, you will be prepared to respond with control to buyer diligence inquiries. Be methodical, and release information only as dictated by the stage of the process — less information during the indication of interest phase, more information after a letter of intent with exclusivity is in place. Hold highly sensitive, confidential information to the end.
If you follow these five steps, you’re more likely to get the price you want for your business instead of settling. After all, it’s your baby and you’ve spent a good part of your life meticulously building it. Why not apply that same level of detail and care to the selling process? It’s a better strategy than simply making the business look better by applying lipstick.
Scott McRill is a shareholder on Clark Schaefer Hackett’s Transaction Advisory Services team. To discuss strategies for readying your business for sale, contact your CSH advisor or Scott at 216-526-8125 or [email protected]